Guide to Transfer Pricing for SMEs

Transfer pricing is now a major issue for SMEs operating internationally. Any company carrying out transactions with related companies located abroad is potentially concerned: provision of intra-group services, management fees invoicing, brand licences, sales of goods, intra-group loans or cost reinvoicing.

Contrary to an idea received, transfer pricing is not limited to large multinational groups. SMEs with a subsidiary, parent company or related entities abroad must also be able to justify their practices with the French tax administration. The strengthening of international tax controls and documentary obligations has led many SMEs to structure their transfer pricing policy.

The principle applicable is that « Competition ». Transactions between related companies must be concluded under conditions comparable to those agreed between independent undertakings. This principle is enshrined by the OECD and incorporated in French tax law.

Why transfer pricing has become a strategic topic for SMEs

The French tax administration strengthens its annual control of international intra-group flows. SMEs are increasingly affected by requests for information on:

• management services;
• trademark fees;
• IT or administrative services;
• flows of goods between subsidiaries;
• intra-group loans and cash advances ;
• margin policies applied between related companies.

In the case of tax controls, the company must be able to demonstrate that the prices charged correspond to a normal economic logic and respect the principle of arm's length.

Lack of sufficient justification may result in significant tax adjustments, with penalties and interest on late payment. The stakes become particularly sensitive when transactions involve several states or territories with preferential taxation.

Transfer pricing methods

International rules provide for several methods for determining a transfer price in accordance with international tax standards.

The main methods used are:

• the comparable price method on the market;
• the resale price method;
• the cost plus method;
• the transactional method of net margin;
• the profit-sharing method.

The choice of method depends in particular on:

• the functions performed by each company;
• risks assumed;
• the assets used;
• sector of activity;
• availability of comparable data.

Serious functional and economic analysis is generally the central point of any transfer pricing documentation.

Documentation transfer pricing: what obligations for SMEs?

Some French companies are subject to enhanced documentary obligations with regard to transfer pricing. However, even when no full legal obligation applies, it remains strongly recommended to provide simplified documentation.

This documentation includes:

• to anticipate fiscal control;
• secure intra-group flows;
• justify the methods chosen;
• demonstrate the economic coherence of operations.

A transfer pricing documentation generally includes:

• a presentation of the group;
• a description of the activities of the companies concerned;
• functional analysis;
• intra-group agreements;
• the method of determining prices;
• the elements of economic comparison.

Official Tax Administration's Guide to Transfer Pricing

In order to help small and medium-sized enterprises understand these problems, the Directorate General for Public Finance (DGFiP) published a reference document entitled « Guide to Transfer Pricing for SMEs ».

This teaching guide presents:

• the basic principles of transfer pricing;
• expectations of the tax administration;
• the main methods applicable;
• Good documentary practice;
• concrete examples adapted to SMEs.

The official guide is available here: Guide to Transfer Pricing for SMEs.

This document is now an essential reference for any SME with international operations.

How to secure its transfer pricing policy?

Secure transfer pricing requires a legal, fiscal and economic approach.

In particular, it is recommended that:

• precisely identify intra-group flows;
• formalize agreements between related companies;
• document the selected methods;
• keep the comparison elements used;
• regularly update the documentation;
• to anticipate the risks of international tax control.

A properly structured transfer pricing policy not only reduces tax risks, but also secures financial relations between the group's companies.

Master Edward Pruvost's support for transfer pricing

Mr. Édouard Pruvost, a tax lawyer specializing in tax law, assists SMEs, international groups and leaders with international tax and transfer pricing issues. Doctor of tax law and holder of the certificate of specialization in tax law issued by the National Bar Council, Master Édouard Pruvost devotes his activity exclusively to tax law.

Its contribution to transfer pricing includes:

• structuring transfer pricing policies;
• writing transfer pricing documentation;
• functional and economic analyses;
• securing international intra-group flows;
• international tax audits;
• tax controls and transfer pricing disputes;
• issues of international group taxation.

The firm also works with companies developing an international activity in order to secure their cross-border operations and limit the risk of tax recovery.

In a context of continuous strengthening of international tax controls, anticipation and secure transfer pricing have become key strategic issues for SMEs and international groups.